Utilities Turn to Mergers as Demand for Power Slows

Even as the number of tablet computers, electric vehicles and Internet data centers multiply rapidly, electricity demand is barely growing. Low-power processors, smarter manufacturing plants, rooftop solar panels and other technologies are keeping a lid on electricity use.

The slowdown is spurring a fresh cycle of deal-making among publicly traded utilities. Not unlike the wave of consolidation that came after deregulation in the 1990s, major electricity players are looking to get bigger to protect their bottom lines.

So far this year, utilities in the United States have announced mergers and acquisitions with a total value of $44 billion. That compares with $30 billion in all of 2010, according to Thomson Reuters.

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The surge of deals “marks the acceleration of a long-awaited consolidation of the U.S. electric utility industry,” said Todd A. Shipman, credit analyst of utilities and infrastructure ratings at Standard & Poor’s.

By his take, today’s deal-making will pick up from the previous era of consolidation. Since deregulation, the industry has shrunk to roughly 50 publicly traded companies, from 100. That number could be halved to 25 in as little as five years, Mr. Shipman said.

While the usual financial pressures to fortify balance sheets and improve credit quality are once again pushing mergers and acquisitions, environmental dynamics are playing a bigger role than in the past. Utilities — facing pending regulation on greenhouse gas emissions and renewed enforcement of older rules on air pollution — must reckon with the rising costs of compliance.

The added expenses come just as growth in electricity demand is being crimped by efficiency gains. Electricity usage increased 0.5 percent a year on average for the decade that ended 2010, down from 2.4 percent a year during the 1990s, according to the Energy Information Administration.

The anemic figures represent the tail end of a six-decade deceleration of electricity demand. The rate peaked in the 1950s, at 9.8 percent a year, during a period of supercharged industrial growth and home construction.

Customers’ plans reflect a secular shift. Nine out of 10 businesses and 70 percent of consumers have set specific goals to lower their electricity costs, according to a recent study by the Deloitte Center for Energy Solutions with the Harrison Group, a research services firm. Nearly a third of companies polled have goals to self-generate electricity, whether through solar panels, reuse of wasted heat or other methods.

Utilities are adjusting to the new reality. With customers tapering their electricity use, Consolidated Edison is deferring the installation of transformers and other costly capital equipment in New York, said Rebecca Craft, the company’s director of energy efficiency and demand management. Con Ed trimmed its outlook for how much the city’s appetite for power will grow in the coming decade to 1 percent a year, from 1.7 percent.

“Practically every utility today is thinking about flattened growth of demand for energy,” said Gregory E. Aliff, a vice chairman of energy and resources at Deloitte.

“In the last wave of utility mergers, it was more offensive — companies were seeking growth,” he said. “Today is different: the industry is more on the defensive. Companies face a question of how to grow, and consolidation is a way to grow earnings.”

New environmental regulations are only heightening the growth challenge. The industry faces potentially sizable bills to meet a raft of air pollution rules being pushed by the White House.

Utilities with a big reliance on coal face the steepest emissions penalties. American Electric Power, which derives about 85 percent of its power from coal, recently estimated the new rules could cost $6 billion to $8 billion in coming years. The money would pay for adding filters to power plant smokestacks, closing coal-fired generators and switching to lower-emission natural gas generators.

Some merger-minded utilities are shedding assets to lower their exposure to such rules. As part of its $7.9 billion deal to buy Constellation Energy, Exelon plans to sell a batch of coal-fired plants. While coal fuels 12 percent of their current generation, the companies aim to halve that share after the merger.

A.E.P., Duke and Exelon declined to comment.

Unlike in previous periods of consolidation, regulators seem more willing to approve deals, given the sluggish economy and job market. Previously, the process could drag on for years, but recent mergers have been moving along more quickly.

This month Connecticut regulators effectively approved Northeast Utilities’ tie-up with NStar, despite opposition from the state’s attorney general. When the $6.9 billion deal including debt was announced last October, the companies pledged that “no broad-based, corporatewide layoffs or early retirements are planned.”

Said Mr. Shipman of S.&P., “In most of these deals, executives have been careful to emphasize that jobs will be spared, rather than cut.”